Tag: Accounting

The Differences Between An Enrolled Agent And A Certified Public Accountant

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By Traci Rutter, EA

Enrolled Agents (EAs) are federally-licensed tax practitioners who may represent taxpayers before the IRS when it comes to collection, audits and appeals.  They are granted unlimited practice rights to represent taxpayers before the IRS and are authorized to advise, represent, and prepare tax returns for individuals, partnerships, corporations, estates, trust and any entities with tax-reporting requirements.  Enrolled agents are the only federally-licensed tax practitioners who specialize in taxation and have unlimited rights to represent taxpayers before the IRS.

Enrolled agents are required to complete 72 hours of continuing education every three years in order to maintain their active enrolled agent license and practice rights.  Enrolled agents are required to abide by the provisions of the Department of Treasury’s Circular 230, which provides regulations governing the practice of enrolled agents before the IRS.

So, what is the difference between an enrolled agent and a certified public accountant (CPA)?  A CPA can provide broad accounting, tax and financial services for businesses whereas an EA focuses specifically on taxes for businesses and individuals.  A CPAs qualifications to practice require state education, usually 150 hours of undergraduate education and pass the four-part CPA exam.  To become an enrolled agent and earn the privilege of representing taxpayers before the Internal Revenue Service, they have to pass a three-part comprehensive IRS test covering individual and business tax returns or through experience as a former IRS employee.

CPAs are equally qualified to do the work of an EA.  The main difference comes in the services each can provide.  CPAs do not focus on only one sector of accounting.  They can assist as advisors or consultants for all accounting, tax and financial services for individuals and businesses they represent.  CPAs help their clients achieve financial goals through financial planning and money management.

Both types of professionals are well-qualified, have minimum continuing education hours that need to be met yearly and have ethical code of conduct to uphold.  Which one you should consult depends largely on the issue you are trying to resolve.  While a CPA has a much wider scope of services they can provide, if you have an accounting need that needs a micro focus, working with an EA could be the perfect fit for you.

Protect Cash Flow By Reviewing Expenses And Plan Design

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Managing cash flow is an ongoing priority for any business.  Protecting an organization’s cash flow in times of economic distress is paramount. To retain liquidity in the short term, many organizations are examining their retirement plans for flexibility in cash outflows.
 
Adjusting or temporarily putting a hold on employer contributions to retirement plans stands out as a prominent option for some, but other less obvious tools can help plan sponsors operate more efficiently during a crisis as well.
 
Before making any changes, employers need to consider both the short-term and long-term consequences of these actions. While such decisions can provide some immediate cash flow relief, they can also increase long-term costs or negatively impact an organization’s employee morale and competitive positioning.
 

Eliminating or Suspending the Employer Match

Eliminating or suspending the employer match, while a potentially effective tool employers can use to shore up cash, may not be an option, depending on how the plan document is written.   Plans that include an annual safe harbor 401(k) contribution may include restrictions relating to the suspension or elimination of these contributions. Plan documents must be thoroughly reviewed before reaching a decision.
 
Even if eliminating or suspending the employer match is an option, employers should approach these decisions with care as they may negatively affect an organization’s ability to attract new employees. This potential backlash may be the reason many employers are hesitating to suspend contributions, even as we anticipate a continued quarantine. A recent survey by the Plan Sponsor Council of America (PSCA) showed that only 16 percent of benefit plans expect to suspend contributions.
 

Eliminating Inactive Participants to Reduce Administrative Costs

Another option could be to reduce the number of participants in a plan to archive a lower administrative cost in upcoming quarters. Employers can achieve this is by removing inactive participants from the plan. The Internal Revenue Service (IRS) allows plan sponsors to cash out inactive participants with $1,000 or less in their accounts, and plan sponsors don’t need permission from the individual to do this. In addition, plan sponsors can roll accounts with balances of $5,000 or less into Individual Retirement Accounts (IRAs).
 
Participants with more than $5,000 in their accounts can’t be forced out of the plan, but plan sponsors are permitted to contact such participants and inquire if they would like to be cashed out. As always, it’s important for plan sponsors to refer to their plan documents before seeking to reduce the number of inactive participants or issue distributions.
 

Review “Lost Money” in the Plan

Several other tools exist that may help plan sponsors operate more efficiently:

  • Forfeitures: Partially vested employees who terminate employment are the most common source of forfeitures. Plan sponsors most commonly use forfeitures to offset employer contributions, but they can also be used to pay for certain permitted plan expenses.
  • ERISA Spending Accounts: ERISA spending accounts present an opportunity to reduce the total costs charged to the plan.  If there isn’t a spending account already, plan sponsors should communicate with service providers to determine whether there may be an opportunity to negotiate one.
  • Evaluate Fees: Plan sponsors have a fiduciary obligation to monitor fees to ensure they are reasonable. Plans should examine their investment, administrative, and consulting fees to determine if saving cash may be possible. Now may be a good time to reach out to service providers to ask for fee reductions. Plan sponsors can also consider shifting some administrative costs, such as audit expenses, from the company to the plan and using forfeitures or ERISA spending accounts for these costs.
  • Changing Eligibility and Matching Provisions: Changing eligibility requirements and / or matching provisions can also help to conserve cash. For example, plan sponsors could require employees to work for at least one year before becoming eligible for a retirement plan.

Insight: Evaluate Cash Conservation Tools Thoughtfully
 
When examining the potential tools at your disposal for conserving cash, it’s important that employers don’t make these decisions in a vacuum. While certain actions can be taken to improve cash flow now, they could lead to greater expenses in the long term—and changes to retirement savings plans may ultimately weaken an organization’s ability to recruit and retain talent.  
Your representative is available to help evaluate your plan and look for opportunities to create valuable flexibility while still being mindful of the long-term impacts of these changes.

Financial Reporting And Accounting Impact on Insurers From Coronavirus Pandemic

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There are many questions that cause anxiety for insurance leaders as they navigate the business implications of the COVID-19 pandemic, including: Will the effects of the pandemic last longer than expected, thereby causing a prolonged spike in life insurance claims? What reimbursement support or relief can the health insurers expect from the federal government for claims related to testing and treatment of the virus? And as people spend more time isolating at home, will a decrease in auto claims frequency be offset by an increase in bad debt expense on premium receivable?

In the face of further uncertainty ahead, there are steps that insurers can take now to mitigate the impacts of COVID-19 on their business. Insurance leaders can look to their CFO and senior financial executives for guidance on critical accounting, financial reporting and operational decisions that can help position the business to sustain through the crisis and thrive in its wake.

Insurers should examine these four key questions to provide some clarity during this uncertain time:
 

1. What impact can insurers expect on asset quality and impairment?

Fixed income securities and mortgage loans make up a majority of insurance company assets.  Current market volatility and a decline in the federal funds rate has caused market value declines on many insurers’ investment portfolios. Here is an analysis on some of the underlying sectors supporting the fixed income asset class.

  • Commercial mortgage loans (CML) and commercial mortgage-backed securities (CMBS): This asset class, which was performing well until recently, has abruptly experienced a sharp decline in value. It could be under duress over the longer term as the economic slowdown caused by the novel coronavirus continues. Take the commercial office space sector, for example. Before the COVID-19 pandemic, occupiers were already experimenting with new workplace designs to foster productivity through shared spaces, which was reducing both their footprint and, in turn, their real estate costs. Now, social distancing requirements due to COVID-19 have changed the long-term market dynamics again as companies realize the benefits of remote working on productivity and costs. Compounding the risk to the real estate sector more broadly, the COVID-19 pandemic has accelerated online shopping purchases, putting additional pressure on many brick and mortar retailers to reduce their store footprint. These underlying trends will have a lasting impact on commercial mortgage loans and mortgage-backed securities held by many insurance companies.
  • Municipal bonds: March saw a significant decline in the S&P Municipal Bond Index, but this recovered quickly as buyers saw bargains in this asset class. According to BlackRock: “Municipals will experience some stress alongside the U.S. economy. Muni issuers must continue to operate despite revenue uncertainty. Some segments will face daunting financial challenges, and federal support may be insufficient. Issuers with solid balance sheets will need to draw down reserves to meet obligations. Safety net hospitals, senior living facilities, mass transit and airports with limited resources will require funding from the states and municipalities they serve. Non-rated stand-alone projects may experience significant credit deterioration.” Overall, this is considered a high-quality asset class which could have some potential downgrades and credit issues along the way if the COVID-19 crisis or the following recession lasts longer than expected. But the overall credit quality in this sector is expected to remain strong.
  • High-quality corporate bonds: These bonds have benefited greatly from recent interventions by the Federal Reserve, such as: cutting the federal funds rate close to zero, opening a lending facility to enhance liquidity in short-term commercial paper markets, and lending directly to corporations and buying investment-grade corporate bonds. In addition, the Treasury restarted its bonds buying program. The Fed is also trying to keep bond markets liquid and functioning smoothly, but the intent is not to rescue the entire corporate bond markets. Issuers with low ratings and certain industries, such as oil and gas, hospitality, entertainment and restaurants, will continue to face downward pressure and may have a difficult time rebounding. This will result in downgrades and credit deterioration over the next several quarters.

These factors will have a direct effect on insurance company investment portfolios, and individual positions with deteriorating asset quality will increase the probability of impairment.
 

2. How is the NAIC providing relief to the insurance industry?

On April 16th, 2020, the National Association of Insurance Commissioners (NAIC) adopted three interpretations in response to policies impacted the COVID-19 outbreak:

  • Interpretation 20-02 provides for a temporary, one-time optional extension of the 90-day rule for uncollected premium balances, bills receivable for premiums and amounts due from agents and policyholders, amounts due from policyholders for high deductible policies, and amounts due from non-government uninsured plans for uncollected uninsured plan receivables. INT 20-02 is available for policies in effect and current prior to the date as of the declaration of a state of emergency by the federal government on March 13, 2020, and policies written or renewed on or after that date. 
  • Interpretation 20-03: Troubled Debt Restructuring Due to COVID-19, was also adopted.This interpretation clarifies that a modification of mortgage loan or bank loan terms in response to COVID-19 shall follow the provisions detailed in the April 7 “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus,” and the provisions of the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act in determining whether the modification shall be reported as a troubled debt restructuring. 
  • Interpretation 20-04 offers limited-time exceptions to defer assessments of impairment for bank loans, mortgage loans and investments, which predominantly hold underlying mortgage loans, that are affected by forbearance or modifications in response to the COVID-19 pandemic.

These short-term interpretations are designed to provide temporary exceptions for insurers’ March 31st and June 30th financial statements, but the working group will continue to review the situation and will consider whether extensions or additional interpretations are necessary.
 

3. How does the CARES Act benefit insurers?

The CARES Act provides significant tax relief for insurers and other mid- to large-sized companies, because it allows for net operating losses from 2018 through the end 2020 to be carried back for five years prior to the loss. This effectively reverses some provisions from the 2017 Tax Cuts and Jobs Act, which had eliminated carrybacks for net operating losses for certain companies, including life insurers. 

The CARES Act now allows companies to carry net operating losses to before the effective date of the Tax Cuts and Jobs Act, in addition to being able to use the previously applicable tax rate. This has additional benefits for insurance companies that can take advantage of applicable tax credits as a result of the carrybacks. The CARES Act also allows companies to file for accelerated refunds of excess alternative minimum tax (AMT) credits by allowing them to claim the refund in full for 2018 or 2019.

These legislative changes combine to provide relief for insurers that could potentially be facing a surge in new claims because of the pandemic. Other tax savings opportunities for insurers include payroll tax credits and deferrals and tax-deductible charitable contributions. To determine eligibility for tax relief under the CARES Act, insurers should contact their tax professional for further guidance.
 

​4. How can insurers re-establish internal control policies in a remote environment?

During the pandemic, remote working capabilities have been an important component of insurers’ business continuity plans, allowing them to continue operations while also maintaining the safety and productivity of employees. However, work-from-home arrangements may give rise to other risks, potentially compromising the integrity and security of an organization’s sensitive financial and accounting data.
 
For example, many employees working remotely may not have the same cybersecurity safeguards as a secure office space. Employees that use their personal devices for work can also expose an organization to increased cyber vulnerabilities. It’s critical that management work with the IT department to re-evaluate the internal control structure and make any necessary adjustments, including ensuring appropriate data retention and privacy practices, as well as confirming comprehensive cybersecurity practices for remote workers.

It remains unclear what impact the COVID-19 pandemic will have on the future earnings and growth prospects for insurers. That’s why it’s imperative for financial leaders at insurance companies to help guide their organization on the path to profitability. A key component of this is advising about all aspects of the applicable relief offered through government stimulus packages. It’s crucial to take steps now that prepare the organization for sound financial reporting and accounting strategies, which can help minimize potential risks to future operations.